Telefonica SA Stock Upgraded (TEF)

NEW YORK ( TheStreet) -- Telefonica (NYSE: TEF) has been upgraded by TheStreet Ratings from hold to buy. The company's strengths can be seen in multiple areas, such as its revenue growth and notable return on equity. We feel these strengths outweigh the fact that the company has had generally poor debt management on most measures that we evaluated.

Highlights from the ratings report include:

The revenue growth greatly exceeded the industry average of 3.2%. Since the same quarter one year prior, revenues rose by 36.2%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.

The return on equity has improved slightly when compared to the same quarter one year prior. This can be construed as a modest strength in the organization. Compared to other companies in the Diversified Telecommunication Services industry and the overall market, TELEFONICA SA's return on equity significantly exceeds that of both the industry average and the S&P 500.

TELEFONICA SA' earnings per share from the most recent quarter came in slightly below the year earlier quarter. This company has reported somewhat volatile earnings recently. We feel it is likely to report a decline in earnings in the coming year. During the past fiscal year, TELEFONICA SA increased its bottom line by earning $2.98 versus $2.45 in the prior year. For the next year, the market is expecting a contraction of 22.8% in earnings ($2.30 versus $2.98).

The change in net income from the same quarter one year ago has significantly exceeded that of the Diversified Telecommunication Services industry average, but is less than that of the S&P 500. The net income has decreased by 4.6% when compared to the same quarter one year ago, dropping from $2,399.95 million to $2,288.85 million.

Reflecting the weaknesses we have cited, including the decline in the company's earnings per share, TEF has underperformed the S&P 500 Index, declining 20.98% from its price level of one year ago. Looking ahead, although the push and pull of the overall market trend could certainly make a critical difference, we do not see any strong reason stemming from the company's fundamentals that would cause a continuation of last year's decline. In fact, the stock is now selling for less than others in its industry in relation to its current earnings.

Telefonica, S.A. provides fixed and mobile telephony services primarily in Spain, rest of Europe, and Latin America. The company has a P/E ratio of 57.4, above the average telecommunications industry P/E ratio of 23.4 and above the S&P 500 P/E ratio of 17.7. Telefonica has a market cap of $92.7 billion and is part of the technology sector and telecommunications industry. Shares are down 7.6% year to date as of the close of trading on Monday.